Most of the investing risk comes from the amazingly wrong, stupid, egoistic assumptions that we make. Here are four of them...
Of course when a person makes these assumptions the Independent Financial Agent/Client does not know that the assumptions are wrong.
1. Equity markets are OBLIGED to give me 12 per cent returns if I hold the shares/ equity mutual funds for 3-4 years, about 15 per cent if I hold on for 7-8 years and about 20 per cent if I hold for more than 10 years. Have you not seen the ad which says 'buy right, sit tight'?
Amazingly wrong assumption to think that the equity market will give returns in isolation to the happenings of other markets. Equity return is a function of prevailing interest rates around the world; performance of other markets; company performance; currency markets, etc.
So a client or an IFA TRYING to 'guess' the returns over 39 years is joking.
The returns to expect in the equity markets are IMPOSSIBLE to guess; so do not get into that game. When you think of some magic number of what is to be expected, you will meet with disappointment. So what is the risk? Well it is the REACTION in panic that can/could do a lot of damage to your portfolio.
2. Client will continue the SIP perennially
When an IFA suggests a SIP to a client and tells the client 'this is a 20 year SIP' the client nods sagely. In three years the client could be bored, need the money, had to make a bulk payment... but either the SIP is stopped or the whole money withdrawn to make a down payment for a house.
Most IFAs hope that the client will at least call them (if not consult) before they stop an SIP or remove money from a particular fund. Not too many clients do that. What is the risk? The goals which were so painstakingly charted out become a joke.
3. 'He is from my community, group, institute, family... so he will look after my interest'
Mostly when you invest in schemes like Sharada chit fund, the 'agent' is usually a victim just as YOU are. S/he has no knowledge, S/he has no clue where the money was going; s/he was getting a 20 per cent commission or its equivalent. People get bad advise; they allow their IFA to sign on their behalf, laugh at forgeries done by IFA and laugh out loud at the banker's risk controls. That is fraud. Do not encourage it. Remember Madoff? He looted his Church first.
People have no clue about the investing skills of their agent or IFA. Or whether s/he is a fraud. If s/he is a member of your club, runners association, or walkers group wake up to the fact that s/he might have joined there SPECIFICALLY to cheat you. Understand the risk? S/he was waiting for you with a trap. You walked in.
4. 'S/he is from a big brand'
Not just that s/he is from a big brand, but s/he takes me for lunch to an exclusive club... s/he works for a big, prestigious firm and the product is very sophisticated, I deserve this 'Platinum' club membership.
Many IFAs internationally have confessed about globally renowned fund houses, investment banks, saying that the IFA himself /herself was TRICKED into selling some obnoxiously bad products to unsuspecting clients. At a much later date the client finds out that the rewards were just not adequate -- or the risk was so high that the capital got wiped out. Wake up.
No amount of legislation can remove the conflict of interest in any business. Whether it is a doctor attached to a big hospital suggesting a course of action or a relationship manager working in a big branded international bank, do your own homework first.
Illustration: Uttam Ghosh/Rediff.com